Federal Reserve in the United States

Federal Reserve System

The Federal Reserve System of the United States is the outgrowth of a movement for what was called “banking reform,” which had been in progress for about 20 years prior to the enactment of the Federal Reserve Act on Dec. 23 1913.

FRS comprises:

• the Board of Governors;
• the 12 Federal Reserve Banks and their 25 branches and other facilities;
• the Federal Open Market Committee;
• the Federal Advisory Council;
• the Consumer Advisory Council;
• the Thrift Institutions Advisory Council; and
• the Nation’s financial institutions, including commercial banks, savings and loan associations, mutual savings banks, and credit unions.

Historical Theory of Federal Reserve System

The theory of the Federal Reserve Act was the separation of the central banking functions of the past from practical bank operation, the latter being carried on through distinct reserve banks under the general direction of a board vested with the banking functions of the past. To carry out this idea, the Federal Reserve Act provided for the creation of a number of central institutions whose membership was to consist of national banks, while institutions organized under state law (banks and trust companies) might at will also become members. Each such bank was obliged to contribute a sum equal to 3% of its capital and surplus and to become liable for an additional 3% which might be called in case of necessity.

The central directing mechanism of the system was the Federal Reserve Board, which consisted of five members chosen by the President of the United States with the Secretary of the Treasury and the Comptroller of the Currency as members exofficio. No two of these five selected members were to be chosen from the same Federal Reserve district. An essential and fundamental requirement of the Act was the compulsory transfer of the reserves of member banks to the Federal Reserve banks, the reserve provisions requiring a minimum of vault cash and a minimum of balances on the books of the Federal Reserve bank, while a certain percentage of the required reserve might be either in vault or in the Federal Reserve bank. This was the so-called “divided reserve.” The maximum required reserve (in central reserve cities) was 18%, of which 5% was to be in vault, 6% with the Federal Reserve bank, and 7% either in vault or with the reserve bank at the discretion of the member. Each reserve bank was authorized to issue currency protected by notes and bills growing out of commercial, industrial or agricultural operations.

These notes and bills were to have a maximum maturity of 90 days, except where they were the product of agricultural transactions, in which case the maturity was raised to 180 days. Deposits of these notes were to be made with an officer known as the Federal Reserve Agent, there being one such officer at every Federal Reserve bank. Each Federal Reserve bank was governed by a board of directors, six of whose members (three bankers and three business men) were chosen by constituent member banks voting in three separate groups according to size of capital, while three (including the Federal Reserve Agent who was also the chairman) were chosen by the Federal Reserve Board.

The Federal Reserve Board was given the function of passing on and establishing rates of discount, such rates, however, being originally named by the boards of directors of the several Federal Reserve banks. The task of dividing the country into districts was placed in the hands of an organization committee with instructions to establish not less than eight nor more than twelve such districts. This committee eventually divided the country into 12 districts with a Federal Reserve bank in each, and the President of the United States named the Federal Reserve Board in accordance with the new law, the new organization taking office Aug. 12 1914. On coming into existence, the board proceeded to organize a Federal Reserve bank in each district; the member banks paid in their stock subscriptions Nov. 2, and the Federal Reserve banks opened for business Nov. 16 1914. As thus organized the initial paid-in capital of the system at opening was about $18,000,000, while the gross reserve balances were $256,000,000.

These balances at the outset were obtained chiefly through actual transfers of specie and legal tender money ($205,000,000), although in some cases rediscount credits were granted to aid members in establishing the necessary legal balance. Each bank was at the outset equipped with a small staff of officers and employees and a uniform accounting system.

The beginning of the year 1915 found the system in operation, but with its transactions upon a small scale. Its first duty was to aid in the retirement of the emergency currency which had been issued shortly after the opening of the World War under the terms of the Aldrich-Vreeland Act as modified by Congress just after the outbreak of the war in such a way as to render the working of its provisions rather more flexible than was possible under the original legislation. At the outset, however, the system was of considerable service in controlling the outflow of gold which had proved to be an embarrassing feature of the economic changes that immediately succeeded the opening of the war, while it also aided in other emergency measures. Various measures were adopted with this end in view the best known being the so-called hundred-million-dollar “gold pool” formed after the outbreak of the war to provide exchange and to check gold losses.

Legal Materials

The Federal Reserve System (“the Fed”) is the central bank of the U.S. The Board of Governors of the Federal Reserve oversees the operation of the Fed. Federal Open Market Committee – comprised of the Governors and bank presidents – sets and implements monetary policy. This includes setting the Federal Funds rate and the Discount rate. Other operations are handled by Congressionally chartered, semi-private regional Banks located in major cities (e.g., the Federal Reserve Bank of New York).

For more information about the Fed’s structure and responsibilities, see The Federal Reserve System: Purposes and Functions.

Print resources: The main hard copy sources for FRB materials are the Board’s ownFederal Reserve Regulatory Service (F.R.R.S.) and the Federal Banking Law Reporter(CCH), both of which include FRB regulations and the Federal Reserve Bulletin. TheService also reprints forms, statutes, the Board’s operating rules and staff opinions(printed after the regulations they interpret). The CCH Reporter includes selected regulation letters, interpretations and rulings. The Reporter is available online by subscription through Intelliconnect.

Fed Web Site: The Fed’s Board of Governors Home Page posts links to sites by the regional Fed banks, press releases, regulations, the Beige Book, letters statistics,research papers, actions, orders, manuals, reports to congress, etc. (www.federalreserve.gov). Forms and regulatory reports are posted on the New York Fed’s Web site under Banking Information / Regulatory and Legal Matters / Regulatory Reports, Forms & Instructions (www.ny.frb.org). Reference Guides and Operating Circulars are posted at www.frbservices.org/OperatingCirculars/index.html. Writtenagreements are included in the Enforcement Actions section from 1997 to the present.

The Federal Reserve Bulletin is available through Westlaw (FFIN-FRB), as discussed below, as well as EBSCOhost’s MasterFILE database (from 7/1/1990) and Proquest (from 1987).

Lexis & Westlaw: Westlaw has FRB Actions (FFIN-FRBACT), Agreements from 1990 to current (FFIN-FRBAGR), Interpretive Letters (FFIN-FRBIL), Speeches (FFIN-FRBSP), the Federal Reserve Bulletin (FEDRSVBUL), the whole F.R.R.S. (FIN-FRRS) – or you can search all Fed materials at once (FFIN-FRB) or all Federal banking agency materials at once (FFIN-ADMIN). Lexis also has a broad collection of Fed materials, including Supervision & Regulation Letters (BANKNG;FEDRSL), “H2’s Announcements” from 1982 to the present (BANKNG;FEDH2) , Orders and Noticesfrom 1992 to the present (BANKNG;FEDORD), Policy Statements and Actions from May 1992 through September 2004 (BANKNG;FEDPOL) andSpeeches/Testimonies/News Releases from October 1983 through June 15, 2005 (BANKNG;FEDSP), plus Interpretive Letters from 1941 to the present (BANKNG;FEDIL), and the F.R.R.S. from February, 1981 to the present (BANKNG;FRRS).

Color Books: The Fed staff produces a number of books for the Federal Open Market Committee (FOMC) that are known by color. They are:

1. The Green Book (or Greenbook), first produced in 1964 and officially titled Current Economic and Financial Conditions – provides an an analysis of the U.S. and international economy. The Green Book is produced for the Federal Open Market Committee (FOMC) and not released to the public for five years. After that the Green Book is posted with the FOMC’s Transcripts and Historic Materials.
2. The Blue Book, first produced in 1996 and officially titled Monetary Policy Alternatives – discusses policy alternatives for the FOMC to consider at the meeting. The Blue Book is produced for the Federal Open Market Committee (FOMC) and not released to the public for five years. After that the Blue Book is posted with the FOMC’s Transcripts and Historic Materials.
3. The Teal Book, first produced in 2010 from the merger of the Green and Blue Books. I have read it is actually white. Presumably, the Teal Book will be made available to the public in 2016.
4. The Beige Book, first produced in 1983 and officially titled Summary of Commentary on Current Economic Conditions – summarizes the economic conditions in each Fed District. The Beige Book is available to the public on release. Historic editions more than five years old are posted with the FOMC’sTranscripts and Historic Materials. Current and historic editions are posted by year and then District in the Minneapolis Fed’s Beige Book Archives.
5. The Red Book was a predecessor to The Beige Book. It discussed specific companies and was not made available to the public.

See Also

• Banks
• Banking
• Bond Prices
• Foreign Currency Exchange Rates
• Interest Rates
• Money Rates
• United States Treasury Securities
• United States Treasury Department
• Federal Reserve bank
• Federal Reserve owners
• Federal Reserve interest rate
• Federal Reserve note
• Federal Reserve economic data
• Federal Reserve act
• Federal Reserve banks
• Federal Reserve bank of new york
• Federal Reserve Polices
• Supervision of Banking Organizations
• Federal Retirement Thrift Investment Board
• Federal Deposit Insurance Corporation
• Free banking
• Government debt
• Legal Tender Cases

Further Reading

• Greider, William (1987). Secrets of the Temple. Simon & Schuster.
• Meltzer, Allan H. A History of the Federal Reserve, Volume 1 and 2
• Lawrence Broz; The International Origins of the Federal Reserve System Cornell University Press. 1997.
• Epstein, Gerald and Thomas Ferguson. “Monetary Policy, Loan Liquidation and Industrial Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (1963)
• Goddard, Thomas H. (1831). History of Banking Institutions of Europe and the United States. Carvill. pp. 48ff.
• Mullins, Eustace C. “Secrets of the Federal Reserve”, 1952. John McLaughlin.
• Steindl, Frank G. Monetary Interpretations of the Great Depression. (1995).
• West, Robert Craig. Banking Reform and the Federal Reserve, 1863–1923 (1977)
• Wood, John H. A History of Central Banking in Great Britain and the United States (2005)